Using Restaurant Servers’ Tips to Offset Credit Card Processing Fees

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Processing fees that are incurred by restaurant owners when a customer dines in and pays by credit card can get expensive and eat at a restaurant’s bottom line. The processing fees are based upon what customer pays on the both the food and beverage bills, as well any gratuity that is left for the server. Savvy restaurant owners, however, may have the opportunity to offset the portion of the credit card fees that is attributable to the servers’ tips.

Under the Fair Labor Standards Act (FLSA), when tips are charged on a credit card and the employer has to pay a credit card company a percentage on each sale, the employer has the option to pay the employees the tip less the percentage that was paid to the credit card company. Reducing the employee’s tips by the allocated portion of the credit card fee cannot reduce the employee’s wage below the required minimum wage.

Example

A customer dines in a restaurant and the total bill is $100 before considering gratuity. The customer pays the bill on their credit card plus a $20 gratuity; a total of $120 is charged to the credit card. The credit company charges a 3% fee on all transactions to the restaurant, which would equal $3.60 for this specific transaction. Of the $3.60 credit card charge, $3 is for the bill (3% of $100) and $0.60 is for the tip (3% of $20). The employer could legally provide the employee $19.40, representing the $20 tip that was earned minus $0.60 for the employee’s pro-rated portion of the credit card charge.

While the FLSA states that an employer can reduce a server’s tips by a portion of the credit card fees, employers should proceed with caution depending upon the state where they are operating their restaurant. For example, the District of Columbia, Maryland, and Virginia do not specifically address whether an employer is or is not entitled to shift a portion of the credit card liability to the employee.

In other states across the county, there are varying provisions. The New York State Department of Labor specifically states that an employer is not required to pay the employee’s pro-rated share of the service charge and can deduct a pro-rated portion of the credit card fee from the employee’s tips. There are also states such as California and Massachusetts where the law requires the employer to pay all costs of doing business and not pass any costs such as credit card fees on to the employees.

Aronson LLC is available for consultation on year-end tax planning and business management topics for restaurants. Please contact Aaron M. Boker, CPA at 240.364.2582 or aboker@aronsonllc.com for more information.

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Aronson LLC has been thinking ahead for its clients for more than 50 years. Aronson’s construction, real estate, government contracting, nonprofit, technology and private industry experts provide innovative audit, tax, and consulting services that help its clients move to the next level. From start-up to exit strategy, Aronson works with companies throughout the entire business lifecycle by proactively identifying opportunities and addressing challenges so that clients are able to focus on their core business. Aronson shows companies how to rethink everything to be more profitable, more competitive and better prepared for the future.

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